House prices relative to income are close to historic highs in Australia, and it's not just Sydneysiders stretching their finances to get into the property market, according to a report from Barclays.
The UK-based bank says price-to-income ratios across the country are nearing previous all-time highs, set in in 2003 and 2010.
However, the difference this time is that these peaks were reached as the Reserve Bank of Australia began lifting interest rates, and not cutting them as it is now.
The risk, according to Barclays, is that further easing by the RBA will drive the metrics even higher, testing borrowers' limits.
The central bank is widely expected to follow up last month's 25 basis point cut to the cash rate, to 2.25 per cent, with another reduction either at Tuesday's policy meeting, or in May.
"In both 2003 and 2010, the ratio of prices to incomes peaked not long after the Reserve Bank had started raising interest rates," said Barclays. "This time the bank is cutting rates."
"This suggests to us that valuations are likely to enter unchartered territory on the back of lower interest rates," it said.
Sydney continues to lead the way, with residential property prices in New South Wales currently worth an average 5.7 times annual household income, compared with 6.3 times in 2003.
Victoria – reflecting mainly Melbourne – is second at 5.3 times annual household income, compared with a previous high of 5.5, in 2010.
Queensland is much cheaper at 3.9 times income, but the Sunshine State is also edging towards all-time highs around 4.4 times.
The national average is 4.8 times income.
"While we are not surprised at the dispersion of price-to-income ratios across the country, house prices are expensive relative to incomes in almost every state," says Barclays.
The bank says the preponderance of investors in the housing market, particularly in Sydney, will force regulators to slap more macro-prudential controls, which are designed to limit riskier lending, on banks this year to offset the stimulatory impact of RBA rate cuts.
The Australian Prudential Regulation Authority in December announced closer monitoring of banks' mortgage portfolios, with particularly attention paid to the growth in lending to buy-to-let or buy-to-sell investors. Growth of more than 10 per cent a year in lending to this segment would raise red flags, APRA warned.
"Even though the Reserve Bank ultimately decided that housing developments were not worrying enough to prevent a rate cut, the board believed that housing developments would 'bear careful monitoring' and said it would be 'important to assess the effects of the measures designed to reinforce sound residential mortgage lending practices announced by APRA in December'," Barclay's said.
In absolute terms, property price growth in Australia since before the global financial crisis had far outstripped most of the developed world, much of which saw their real estate markets ravaged by the crisis and subsequent recession.
"In Australia's case, we calculate that house prices have increased by almost 50 per cent since before the global financial crisis hit," said Barclays.
"This compares with GDP-weighted world prices that are 6 per cent lower.
"UK prices are 17 per cent higher, but US and Euro area prices are 9 per cent and 2 per cent lower, respectively. Japanese prices are 17 per cent lower.
According to a report on Monday from CoreLogic RP Data, dwelling prices across Australia rose an average 0.3 per cent in February, to put growth over the last 12 months at 8.3 per cent. The monthly growth rate eased from 1.3 per cent in January and 0.9 per cent in December.
Melbourne was the best-performing capital city, ahead 4.5 per cent in the rolling quarter between December and February, followed by Sydney at 2.8 per cent.
CoreLogic RP Data head of research Tim Lawless says the growth slowdown in February would surprise those who expected RBA easing to have pumped up values.
"We might not see the lower interest rate environment stimulate the housing market as much as it has in the past," he said.
"Weaker jobs growth, higher unemployment, declining affordability, low rental yields and political uncertainty are all factors that could dent consumer confidence and provide some counter balance to the rate cuts and quell any additional market exuberance."
Barclays, however, says property price inflation nonetheless appears unstoppable at the moment.
"On our estimation, house prices will reach 4.8 times annual household income this quarter, based on the increase in prices to date and assuming that incomes continue to grow at a similar rate to recent quarters," Barclays said.
"That is, we estimate that national home prices have reached $586,000 compared with annual income per household of $122,000.
"This would match the previous all-time high reached once in 2003 and again in 2010," the bank said.
